CFTC's O'Malia says 'high frequency regulation' causing angst

First Published 31st May 2012

The CFTC's O'Malia, an outspoken critic of the pace of regulatory reform, described the problems created by "high frequency regulation" as he outlined a hectic agenda for the coming months.

"The pace has been frenetic. We have not spent enough time thinking through all of the potential issues" - Scott O'Malia

New York City - Scott O'Malia of the
Commodity Futures Trading Commission (CFTC) expressed growing
worry over what he called "high frequency regulation",
complaining that not enough analysis was being done and that
market participants faced confusion due to the complexity and
speed of regulatory reform.

O'Malia, who has been outspoken in his criticism of the approach
regulators are taking, nonetheless said the CFTC was on track to
implement OTC clearing in the fourth quarter for major banks. He
emphasised the breakneck pace of reform by noting what was on the
agenda for the CFTC in the next few months.

"The pace has been frenetic. We have not spent enough time
thinking through all of the potential issues," O'Malia said in a
speech.

"Similar to high-frequency trading, the market is unfamiliar with
the exact goals and objectives of the Commission's rulemaking and
can only react. Without a schedule of rules and clear compliance
dates, the market is left guessing as to whom the rules apply,
when they must comply and what venue they must connect. "

He said that while clearing of OTC contracts for major banks was
set for the fourth quarter, he believed the Commission would not
require managed money and end users to clear until early-to-mid
2013.

O'Malia expects the commission this summer will issue its
definition of a swap, cross-border guidance, mandatory clearing
determinations, and the final implementation timetable for
clearing. In July, he expects a vote on rules regarding trade
execution, including the final rules for SEFs, as well as Core
Principle 9 for Designated Contract Markets.

"Without a doubt, the Commission will be busy this summer," he
said.

The issue of cross-border guidance has been a major concern as
firms fear that they could get caught in cross-fire between
regulations issued by the United States and Europe, all of which
are being put together to satisfy the mandate by the G20 issued
in 2009, which calls for the OTC market to be subject to clearing
by the end of this year.

O'Malia said cross-border guidance should take into account four
principles:
- it should not overreach or step on the toes of sovereign
nations;
- it should be based on principles of international harmonisation
and be a coordinated effort with the Securities and Exchange
Commission as well as foreign regulators;
- it should demonstrate the costs and benefits of setting its
jurisdiction;
- and it should ensure that its registrants and registered
entities remain competitive in global financial markets.

One of five commissioners at the CFTC, O'Malia said the
commission in the past issued perhaps three or four rules a year.
Now, in order to complete the "Herculean task" of finalising more
than 50 rules, the Commission has established more than 30
multi-disciplinary, rule-writing teams.

"As a result of our high-frequency regulatory approach, several
of our final rules have created significant regulatory
uncertainty and unnecessary angst; much like the uncertainty and
angst surrounding the HFT activity during the Flash Crash of
2010," he said.

He described the recently finalised swap dealer definition --
which O'Malia termed the "poster-child for high-frequency
regulation" -- as an overly complex definition that would require
several commercial firms and cooperative banks to register as
swap dealers if it were not for a generous and temporary de
minimis threshold for swap dealing activities at $8 billion.

"Due to the complexity of this 600+ page final rule, some
commercial firms will be confused as to whether they will be
considered a swap dealer or not," he added.

The license approval process for swap data repositories and swap
execution facilities has also been problematic, O'Malia said. The
Commission has received four SDR applications, but has approved
none. The problem, he added, will be compounded when dozens of
SEF applications start to arrive.

O'Malia said the CFT needs to engage in reform based on facts and
thorough economic analysis. The reform needs to provide
participants with more certainty.